How Netflix just made a bad thing worse

Netflix witnessed a storm of customer outrage and tumbling stock prices this month as they dramatically increased their price for subscription to the service. Early this morning, CEO Reed Hastings reacted with an email to customers. The email started, “I messed up. I owe you an explanation.” And an explanation did follow – not only about why the price hike would continue, but also about how subscribers would now be paying for two services, Netflix and Qwikster, if they wished to continue with the full set of features previously provided. I predict that this latest move will lead to even more problems for the company.

I am a longtime subscriber to Netflix and enjoy their DVD and streaming services immensely. Sure, I was irritated with the dramatic price increase just like many other customers. But I accepted it and opted to continue receiving their services. The latest change has led me to reconsider my options, however. I enjoy movies and television, but do I really need to subscribe to more than oneindependent service provider for this? I never saw a reason to subscribe to Hulu plus or Amazon Prime for their video services because Netflix was already meeting my needs. So why should I subscribe to both Netflix and Qwikster? I shouldn’t and I now intend to update my video subscription service accordingly.

What Netflix must realize is that my decision to opt out of one service has little to do with its actual price. Hastings makes clear in his email to customers that “There are no pricing changes (we’re done with that!).” Rather, it is my perception that has changed. I do not want to pay for two very similar video services. And I predict that many other customers will think and react similarly. Consider research addressing the effectiveness of partitioned versus bundled pricing. Sheng, Bao, and Pan (2007) state, “It is profitable to partition a total price into two separate parts only when the surcharge is relatively small compared to the base price, or the surcharge has a well-justified purpose. Otherwise, an all-inclusive price might generate higher purchase intentions, thus increasing demand.” Not only did Netflix partition its prices in such a way that has already proved to drive away customers, but they now want us to continue our patronage through two independent service providers. And away go another group of subscribers.

I hope that Netflix has thought about this issue more than I have because it is likely to have long-term consequences for their success as a company. Dramatic price hikes this month drove enough customers away. Making it psychologically easier for us to forgo their services is unlikely to make things better.